China North East Petroleum has acquired all of the equity interest in Song Yuan Tiancheng Drilling Engineering Co. Ltd. ("Tiancheng"), an oil drilling and services company based in Song Yuan City, China. This acquisition marks NEP's expansion into the oilfield services industry and enhances the Company's vertical integration within China's private oil exploration and production (E&P) industry.
NEP paid US $13.0 million in cash for 100% of the equity interest in Tiancheng. Due to PRC legal restrictions, 5% of the equity interest has to be held in trust for the benefit of NEP.
Tiancheng is a leading oil drilling and services company with seven rigs in operation. With approximately 320 employees, it has the capacity to drill 220 wells on an annual basis. Tiancheng is the largest of three PetroChina-licensed private drilling operators based on the total number of drilling rigs. The company counts PetroChina and two private oil producers as its main customers. PetroChina represents the majority of the company's revenue and NEP has not utilized Tiancheng for drilling services in the past. In 2008, Tiancheng generated revenue of approximately $14.7 million, net profit of $5.2 million and was cash flow positive from operations.
"We are extremely pleased with this acquisition, which transforms China North East Petroleum into a more diversified oil exploration and production company," commented Mr. Hongjun Wang, President of China North East Petroleum. "We believe that the vertical expansion of our business into oilfield services will increase our competitive advantage and provide us with an opportunity to capture additional business from China's state-owned oil companies, who continue to invest heavily in the drilling and services sector. This agreement allows us to better develop lease opportunities with China's SOE's at terms that are more favorable for our company. Further, possessing in- house drilling rigs can accelerate our drilling schedule and lower operating costs. Tiancheng has generated consistently solid financial results, including operating margins in the mid-40% range, net margins in the mid-30% range and steady operating cash flow."
"With the addition of Tiancheng, we are building a platform that strengthens our relationships with SOEs, enhances our business development opportunities, reduces our exposure to oil price volatility and further establishes NEP as a major player in China's private oil E&P industry. We look forward to providing our shareholders with an update on our business in the coming weeks," concluded Mr. Wang.
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